1995 (10) TMI 29 - HC - Wealth-tax

Summary

Issues Involved:
1. Inclusion of the value of self-generated goodwill in the net wealth of the assessee under section 7(2) of the Wealth-tax Act, 1957.
2. Interpretation and application of rule 2C of the Wealth-tax Rules, 1957.
3. Role of accounting principles and Board instructions in determining the value of goodwill.

Issue-wise Detailed Analysis:
1. Inclusion of the Value of Self-Generated Goodwill:
The primary issue was whether the value of goodwill, which was not purchased for a price and not part of the book assets as disclosed in the balance-sheet, should be included while assessing the value of business assets under section 7(2) of the Wealth-tax Act, 1957. The court noted that goodwill is an intangible asset, whose value is difficult to predict and fluctuates with the business's reputation and other factors. It is generally not included in the balance-sheet unless purchased for a price.

2. Interpretation and Application of Rule 2C:
The court examined rule 2C, which specifies adjustments to be made for assets not disclosed in the balance-sheet. Rule 2C(b) states that the value of goodwill purchased by the assessee for a price should be included at its market value or the price paid, whichever is less. The court emphasized that self-generated goodwill, not shown in the books, should not be included in the balance-sheet for the purpose of global valuation under section 7(2). The court relied on the Board's instructions, which indicated that no attempt should be made to include the value of goodwill unless it has been actually paid for and shown in the balance-sheet.

3. Role of Accounting Principles and Board Instructions:
The court highlighted the importance of accounting principles, noting that self-generated goodwill does not usually appear in the books of account. It referenced various accounting experts who assert that goodwill should only appear in the balance-sheet if purchased. The court also considered the Board's instructions, which were binding on wealth-tax authorities, stating that self-generated goodwill should not be included in the global value of business assets. The court found that these instructions were consistent with the rules and aimed to maintain uniformity in the execution of the Act.

Conclusion:
The court concluded that self-generated goodwill, not shown in the balance-sheet, should not be included in the net wealth of the assessee under section 7(2) of the Wealth-tax Act, 1957. The court answered the referred questions in favor of the assessee and against the Revenue, holding that the Tribunal was justified in excluding the value of self-generated goodwill from the net wealth assessment. All three references were disposed of accordingly, with no order as to costs.